The Selected Issues paper discusses external shocks and its effects on Chile. The economy of Chile is susceptible to global financial predicaments, external demands, and commodity rates. This paper reports on financial spillovers from 2008–12, its methodologies, and the pressures on bank funding markets. The paper also examines performance of nonfinancial sector during the 2008–09 crisis. The Executive Board sees the document as an analytical description of Chile in the global scene.

Abstract

The Selected Issues paper discusses external shocks and its effects on Chile. The economy of Chile is susceptible to global financial predicaments, external demands, and commodity rates. This paper reports on financial spillovers from 2008–12, its methodologies, and the pressures on bank funding markets. The paper also examines performance of nonfinancial sector during the 2008–09 crisis. The Executive Board sees the document as an analytical description of Chile in the global scene.

I. Output Fluctuations in Chile—the Role of External Factors 1

A. Introduction

1. As a small and open economy, Chile is exposed to external shocks. Chile’s trade openness and international financial integration are significant and copper accounts for a major share of exports, so the economy is potentially vulnerable to changes in global financial conditions, external demand, and commodity prices. A high quality policy framework, however, mitigates this vulnerability. The combination of a strong fiscal policy framework, a credible inflation targeting regime, and a flexible exchange rate regime increases Chile’s resilience to changes in external conditions.

2. This chapter attempts to quantify the potential impact of external shocks on Chile’s economic activity. This question is of particular interest today, in light of increased uncertainty about the global economic outlook. What impact would negative external shocks have on Chile’s growth performance? More specifically, how renewed bouts of global risk aversion or a sharp decline in copper prices are likely to affect Chile? This chapter aims to address these questions, using a vector autoregressive (VAR) approach. The results suggest that external shocks—both financial and real—have a significant impact on Chile’s output, and explain a sizable fraction of Chile’s business cycle fluctuations. In particular, movements in copper prices and changes in international financial conditions play an important role.

3. The chapter is organized as follows. The next section documents Chile’s trade and financial integration with international markets and the degree of commodity dependence and concentration of exports, from a historical and regional perspective. Section C describes the empirical approach and presents estimates of the effect of external shocks on Chile’s output. The final section concludes with a brief discussion of policy implications.

B. Stylized Facts: Chile’s Exposure to External Factors

4. Chile’s degree of trade openness is significant. Chile witnessed a process of increased trade integration with the rest of the world in the past two decades, supported by unilateral import tariff reductions and the signing of several free trade agreements, including with the U.S. and the E.U. In fact, Chile’s economy exhibits the largest degree of trade openness in the region (Figure 1).

Figure 1.
Figure 1.

Latin America: Trade Openness 1

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Ratio of the sum of exports and imports to GDP, in percent.

5. Chile continues to be highly dependent on commodities. Chile is one of the most commodity dependent economies among emerging markets (Figures 2 and 3), and this feature has become more pronounced over time—with net commodity exports doubling from about 10 percent of GDP in 1970–80 to almost 20 percent in 2010. Moreover, commodities represent almost 70 percent of total exports, with a very high concentration in metals (mainly copper). Chile’s share of commodities in total exports is almost 10 percentage points higher than the average for South America, and about three times larger than in Mexico and Central America, and emerging Asia, which experienced significant diversification in the past decades (Figures 3 and 4). Commodity-related fiscal revenues are also significant, accounting for 17 percent of total revenues (3½ of GDP) in 2012.

Figure 2.
Figure 2.

Commodity Dependence: Net Commodity Exports

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Sources: World Integrated Trade Solutions database; and author’s calculations.1 Simple average for Argentina, Brazil, Colombia, Ecuador, Peru, Uruguay, and Venezuela.2 Simple average for Mexico, Costa Rica, El Salvador, and Guatemala.3 Simple average for China, India, Indonesia, Korea, Malaysia, Philippines, and Thailand.
Figure 3.
Figure 3.

Commodity Dependence and Export Concentration

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Sources: World Integrated Trade Solutions database and author’s calculations.
Figure 4.
Figure 4.

Commodity Export Concentration: Gross Commodity Exports

(Percent of total exports of goods and services, unless otherwise indicated)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Sources: World Integrated Trade Solutions database; and author’s calculations.1 Simple average for Argentina, Brazil, Colombia, Ecuador, Peru, Uruguay, and Venezuela.2 Simple average for Mexico, Costa Rica, El Salvador, and Guatemala.3 Simple average for China, India, Indonesia, Korea, Malaysia, Philippines, and Thailand.

6. The high reliance on copper exports increases the economy’s exposure to global economic developments, given the high sensitivity of metal prices to the global cycle. Net commodity exporters are particularly affected during episodes of global recessions (Figure 5), displaying lower exports (values and volumes) and domestic output growth than non-commodity exporters. Moreover, the degree of vulnerability to a global slowdown varies within the group of commodity-exporting economies, with metals (and energy) exporters being especially vulnerable given the higher sensitivity of their export prices to the global cycle (Figure 6).

Figure 5.
Figure 5.

Macro Performance of Commodity Exporters and Other Emerging Economies during Global Recessions, 1980–2010 1

(Median cumulative growth, peak year = 0)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Median values are reported. Based on Hodrick-Prescott-filtered estimates of output gap for advanced economies, using industrial production. All recessions display the same pattern, except for the one following the 2008-09 financial crisis (the commodity price slump was short-lived in the latter case).2 Year at which estimated output gap closes.
Figure 6.
Figure 6.

Commodity Prices During Global Recessions, 1960–2010 1

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Recessions defined on the basis of estimated output gap for advanced economies (using industrial production series). A slowdown is considered a recession if the output gap reaches at least−1. 5 percent of potential output for at least a quarter. Reported commodity prices are in real terms.2t corresponds to the month of the peak value of the cyclical component of output, before ouput falls below potential. Only the first 30 months are reported as length of recessions varies across cases. Oil shocks of 1969 and 1973 are excluded.

7. Chile is also one of the most financially integrated economies among emerging markets. Chile has been at the forefront of financial and capital account liberalization in the last decades. Today, it stands as one of the emerging market economies with the deepest international financial integration—measured as the sum of total foreign assets and liabilities, relative to GDP (Figure 7).2 A similar picture is obtained by using a measure of capital account openness based on the index constructed by Chinn and Ito, 2008 (Figure 8).

Figure 7.
Figure 7.

Financial Integration, 1990–2010 1

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: Updated and extended version of the Lane and Milesi-Ferretti (2007) database; and IMF (2012).1 Foreign assets plus foreign liabilities net of international reserves and official external debt.
Figure 8.
Figure 8.

Capital Account Openness, 2005-2010 1

(Index)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Based on an updated version of the Chinn and Ito (2008) index. A higher value indicates higher capital account openness.

8. The degree of vulnerability to external shocks also depends on the flexibility and quality of the policy framework.3 Due to the strength of its policy framework, Chile’s output decline during periods of global financial shocks has been broadly in line with that of other countries in the region, despite the country’s deeper integration with international financial markets (Figure 9). Several recent studies have shown that Chile has become more resilient to changes in external conditions (in particular to copper price shocks) in the past two decades, arguing that this is mainly due to better policies and stronger fundamentals.4 This chapter does not attempt to quantify the role of policies in mitigating shocks. Instead, it aims to assess empirically the magnitude of external spillovers to Chile (which also reflect the policy reactions to foreign shocks). In contrast to previous studies, the period of analysis focuses on the last two decades (a period of sound policies and strong fundamentals compared with the 1970–80s). The sample period includes the 2008–09 global financial crisis and the subsequent period of high volatility of external variables.

Figure 9.
Figure 9.

Output Performance during Global Financial Shocks, 1990–2011 1

(Cumulative)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: IMF (2012).1 Cumulative change in the cyclical component of GDP, in percent of (potential) GDP. Dotted lines reflect regional medians.2 Average of different episodes, excluding cases of identified idiosyncratic events: Asian countries (1997), Russia (1998), Brazil (2002), and Uruguay (2001–02).

C. External Factors and Output Fluctuations in Chile: A VAR Approach

Empirical strategy

9. A standard VAR model is estimated to quantify the extent of spillovers from external shocks. This empirical approach allows one to examine the role played by external factors as sources of business cycle fluctuations in Chile, and to identify the dynamic responses of Chile’s output to external shocks.

10. The structural model can be expressed as follows:

A(L)yt=γt

where yt is an n vector of variables, A(L) denotes a lag polynomial matrix, and Υt is an n vector of structural disturbances or shocks. A0, which represents the contemporaneous relationships between the variables of the model, is a non-singular matrix normalized to have ones on the diagonal.

11. The reduced form corresponding to this structural model can be written as:

B(L)yt=ut

where B(L) is a lag polynomial matrix such that B(L) = (A0)-1 A(L) and B0 = I, and ut is an n vector of mean zero reduced form disturbances with covariance matrix Г, such that

ut=(A0)1γt.

12. The vector yt includes a set of external factors (international financial conditions, global demand, and copper prices), and Chile’s real output. The external variables are measured as follows:

  • International financial conditions are proxied by the S&P 500 Chicago Board Options Exchange Market Volatility Index (VIX);5

  • Global demand is proxied by a weighted average of real GDP of the Group of Seven countries and China, with weights proportional to their purchasing-power-parity-adjusted GDPs; and

  • International copper prices are measured in real terms and stripped of exchange rate effects (as in Adler and Sosa, 2011).

13. The model is estimated using quarterly data from 1990:Q1 through 2011:Q4. All the variables are expressed in log levels, and the model is estimated in first differences (except the VIX, which is expressed in levels), using two lags.6 Data sources include the IMF’s International Financial Statistics (IFS) and World Economic Outlook (WEO), and Haver Analytics.

14. To identify the structural parameters of the model, a set of restrictions must be specified. Following Sims (1980), the reduced form errors are orthogonalized by standard Choleski decomposition. This identification strategy assumes that the correlation of errors across equations is assigned to the equation that appears first in the ordering. The selected ordering of the variables is as follows: the VIX, global output, copper prices, and Chile’s domestic output.7

Econometric results

15. External shocks have a significant impact on Chile’s output(Figure 10). A positive shock to the VIX has a negative impact on output.8 The shock is transmitted fairly quickly—with most of the impact taking place within the same quarter—and the impact on growth is typically short-lived. A positive shock to global demand leads to an increase in Chile’s output, with the impact on growth lasting for about one year. A positive shock to copper prices is also expansionary, with the effects on growth lasting for three quarters.9

Figure 10.
Figure 10.

Chile: Output Response to External Shocks 1

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Response of Chile’s GDP growth rate to one standard deviation external shock s. Time horizon in quarters.2 Response to one s.d. shock to the VIX (4.1 units) ± 1.5 standard errors.3 Response to one s.d. shock to global GDP growth rate (0.4 percentage points) ± 1.5 s.e.4 Response to one s.d. shock to copper prices (10 percentage points) ± 1.5 s.e.

16. To gauge the economic significance of the impact of external shocks, the cumulative impact on the output level is computed (Figure 11). A one standard deviation shock to the VIX (4.1 units) leads to an output loss of 0.7 percent after 8 quarters. A shock to global demand growth (of 0.4 percentage points) increases Chile’s output by 0.7 percent over the same horizon. Finally, a one standard deviation shock to copper prices (10 percentage points) increases output by 0.8 percent. Interestingly, despite being an economy highly integrated with the rest of the world, the impact of external shocks on Chile’s economic activity is roughly similar to the regional average (Table 1).

Figure 11.
Figure 11.

Chile: Accumulated Response of Output to External Shocks 1

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Accumulated response of Chile’s GDP to one standard deviation external shock s. Time horizon in quarters.2 Response to one s.d. shock to the VIX (4.1 units) ± 1.5 standard errors.3 Response to one s.d. shock to global GDP growth rate (0.4 percentage points) ± 1.5 s.e.4 Response to one s.d. shock to copper prices (10 percentage points) ± 1.5 s.e.
Table 1.

Cumulative Impact on Output

(After 8 quarters, in percent)

article image
Source: author’s calculations.

Equivalent to 4.6–4.8 units (VIX), 0.4 percentage points (global GDP), and 5.1–5.5 percentage points (commodity prices).

Except for Chile, a broad commodity price index is used.

Excluding Chile.

17. Variance decomposition analysis shows that foreign factors are a significant source of business cycle fluctuations in Chile. External shocks account for almost 20 percent of the variance of Chile’s real GDP growth at standard horizons (Table 2).10 Copper prices are the most important external source of fluctuations, explaining about 10 percent of Chile’s output variance.

Table 2.

Chile: Variance Decomposition of Output

(Percent)

article image
Source: author’s calculations.

18. Finally, a historical decomposition analysis is used to assess how the importance of external shocks has evolved over time. Figure 12 shows the decomposition of Chile’s GDP growth in the past decade, with the contribution of each of the foreign factors.11 Growth in the early-2000s was mainly explained by domestic factors. The contribution of external variables was actually negative in that period—characterized by low copper prices, and tight financing conditions for emerging markets (some countries in the region experienced deep financial crisis during this period, i.e., Argentina and Uruguay). External factors—particularly copper prices—explained a significant fraction of growth during the boom preceding the Lehman crisis, especially in 2006–07. The Lehman crisis strongly affected the Chilean economy, with external shocks—both financial and trade ones—explaining almost entirely the decline in growth. The recovery of copper prices contributed to Chile’s economic recovery, with the output decline in the first quarter of 2010 being explained by the effect of the earthquake. More recently, the results suggest that while copper prices have continued to support economic activity in Chile, a substantial fraction of the observed growth has been explained by domestic factors.

Figure 12.
Figure 12.

Chile: Historical Decomposition of Output

(Percent)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.

Channels of transmission

19. The results suggest that domestic demand is particularly sensitive to global financial shocks. As shown earlier, an increase in the VIX typically leads to a decline in output in Chile. Domestic demand suffers a particularly strong decline after these shocks (Figure 13).12 This is consistent with the results in Carrière-Swallow and Céspedes (2011), which show that a global uncertainty shock typically has a negative impact on investment and private consumption in emerging markets, including Chile.

Figure 13.
Figure 13.

Chile: Response to a VIX Shock 1

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Response to one s.d. shock to the VIX (4.3 units) ± 1.5 standard errors. Time horizon in quarters.

20. How are global financial shocks likely to be transmitted? To shed some light on this question, we follow an approach similar to the one proposed by Bayoumi and Swiston (2008) to examine whether the credit channel plays a role as a transmission mechanism.13 The exercise consists of augmenting the VAR by including credit growth in the model. The model is estimated using two alternative specifications: first, with credit growth as an endogenous variable and next, with credit growth as an exogenous variable. The estimated responses in the first specification capture the overall impact on Chile’s output (or domestic demand) of a VIX shock, including the indirect (and possibly amplifying) effect through domestic credit. The second specification, in contrast, computes the responses to a VIX shock, “shutting off” any indirect effect through the credit channel. Thus, the role of bank credit as a channel can be gauged by the difference between the responses to the global financial shock in the two specifications, as follows:

Bt=r1tr2t

where r1t is the response of domestic output (or, alternatively, domestic demand) in period t from the model including credit as an endogenous variable, and r2t is the response from the alternative specification where credit is included as an exogenous variable.

21. The results suggest that credit indeed amplifies global financial shocks. A significant fraction of the effect of an adverse external financial shock on output (or domestic demand) may be attributed to the credit channel (Figure 14). This amplification effect encompasses: (i) the sensitivity of credit growth to global financial shocks and ii) the effect of the credit response on domestic demand (Figure 15). The exercise, however, cannot rule out other potential explanatory channels proposed in the literature. For example, in models with adjustment costs and option-value of waiting mechanisms, economic agents reduce investment and consumption in durable goods voluntarily in periods of high uncertainty, given that the range of optimal inaction widens.14 Moreover, the approach used in this study does not allow to disentangle the extent to which the decline in credit growth triggered by a global financial shock is mainly supply or demand driven, or a combination of both.

Figure 14.
Figure 14.

Chile: Response of Output and Domestic Demand to a VIX shock 1

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Response of Chile’s GDP and domestic demand growth to a one standard deviation shock to the VIX. Time horizon in quarters.
Figure 15.
Figure 15.

Chile: Amplification Effect of Credit

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Response to one s.d. shock to the VIX (4.3 units) ± 1.5 s.e.2 Response to one s.d. shock to credit growth (0.9 percentage points) ± 1.5 standard errors. Time horizon in quarters.

22. Copper price shocks also appear to have a significant impact on Chile’s domestic demand. Figure 16 suggests that most of the impact of copper price shocks on Chile’s growth could be attributed to the response of domestic demand. Real exports also increase on impact, but the effect is smaller and typically short-lived, probably reflecting the fact that the volume of copper production is relatively inelastic in the short run.15 Figures 17 and 18 illustrate the reaction of the different components of domestic demand to a copper price shock, providing some insights on the possible channels. Investment appears to very sensitive to copper prices, while private consumption also tends to increase during copper price booms. The reaction of public consumption, on the other hand, appears to be more muted, consistent with the fiscal framework.

Figure 16.
Figure 16.

Chile: Response to a Shock to Copper Prices 1

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Response to one s.d. shock to copper prices (10 percentage points) ± 1.5 standard errors. Time horizon in quarters.
Figure 17.
Figure 17.

Chile: Response to a Shock to Copper Prices 1

(alternative specification)

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Response to one s.d. shock to copper prices (10 percentage points) ± 1.5 standard errors. Time horizon in quarters.
Figure 18.
Figure 18.

Chile: Accumulated Response to a Shock to Copper Prices 1

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Response to one s.d. shock to copper prices (10 percentage points) ± 1.5 standard errors. Time horizon in quarters.

23. What transmission channels can explain the impact of copper prices shocks on private domestic demand? First, a higher copper price creates positive income and wealth effects. Whether copper-related revenue is private or public should in principle be irrelevant in this regard assuming the Ricardian equivalence holds.16 Larger capital inflows (both FDI and portfolio flows) associated with higher export prices could also reinforce the boost to demand if foreign investors bid up domestic asset prices, further increasing Chilean wealth. Second, to the extent that the increase in copper price is (or is perceived as) permanent, the net present value of expected profits in mining companies is higher, thus increasing investment in that sector. The high sensitivity of investment to copper price fluctuations illustrated by the impulse responses presented in this section is consistent with this channel. Third, the increase in private consumption could also be explained by the existence of borrowing constraints, which tend to be eased during periods of high copper prices.17 Finally, the real exchange rate may also be playing a role. A large fraction of durable goods in Chile are imported and are sensitive to the real exchange rate. Moreover, copper price changes are a key driver of real exchange rate fluctuations. This could (at least partly) explain why private consumption increases during copper price booms in Chile.

24. Finally, both real exports and domestic demand are affected by shocks to global demand. As shown earlier, a positive shock to global output is typically expansionary. Interestingly, this type of shocks affects not only exports (as expected) but also domestic demand (Figure 19).

Figure 19.
Figure 19.

Chile: Response to a Global Demand Shock 1

Citation: IMF Staff Country Reports 2012, 266; 10.5089/9781475510492.002.A001

Source: author’s calculations.1 Response to one s.d. shock to global GDP growth rate (0.4 percentage points) ± 1.5 s.e. Time horizon in quarters.

D. Concluding Remarks

25. The main findings of this chapter suggest that Chile remains vulnerable to changes in external conditions. The chapter provides an empirical evaluation of Chile’s sensitivity to external shocks. The main results suggest that external shocks—both real and financial—have a significant impact on Chile’s output and are important drivers of business cycle fluctuations in Chile. In particular, movements in copper prices and changes in international financial conditions play an important role.

26. The exposure of the economy to external shocks underscores the importance of a sound policy framework and the need to maintain substantial fiscal buffers. Given the large potential impact of a sharp deterioration of the external environment, Chile should maintain strong fiscal buffers. Continued fiscal discipline would also help strengthen Chile’s external position.

References

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  • Adler, G. and S. Sosa, 2012, “Intra-Regional Spillovers in South America: Is Brazil Systemic after All?” IMF Working Paper 12/145 (Washington: International Monetary Fund).

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  • Bayoumi, T. and A. Swiston, 2008, “Spillovers Across NAFTA,” IMF Working Paper 08/3 (Washington: International Monetary Fund).

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1

Prepared by Sebastián Sosa.

2

An updated and extended version of the Lane and Milesi-Ferreti (2007) data set is used.

3

Adler and Sosa (2011) and IMF (2011), for instance, show that limited exchange rate flexibility, a weak underlying external position, and loose fiscal policy tend to amplify the negative effects of terms-of-trade shocks on domestic output, whereas financial dollarization also appears to act as a shock “amplifier.” IMF (2012), in turn, finds that external sustainability and especially exchange rate flexibility play a key role in mitigating the effect of global financial shocks.

4

See, for example, Franken, Le Fort, and Parrado (2004); Betancour, De Gregorio, and Medina (2006); and De Gregorio and Labbé (2011).

5

The VIX is frequently used as a measure of global uncertainty or financial stress in the recent empirical literature. Bloom (2009), for instance, shows that this volatility index is highly correlated with measures of micro and macro-level uncertainty, including from financial variables. More recently, Carrière-Swallow and Céspedes (2011) also used the VIX to measure global uncertainty shocks.

6

Standard unit root tests (augmented Dickey-Fuller) show that all the variables are stationary in first differences (except the VIX, which is stationary in levels). In addition, most co-integration tests suggest that the variables in the model are not co-integrated. Hence, we estimate the model in first differences. The number of lags is based on the Akaike Information Criterion (AIC).

7

Results are robust to different orderings within the group of external variables. The model was also estimated using block exogeneity restrictions for the set of external variables and the main findings hold.

8

The impact of external shocks on domestic GDP is, of course, dependent on the policy response. The impulse responses here illustrate the impact on output given the average policy responses during the period of analysis. This could be problematic in case of sharp changes in policy regimes. However, Chile’s macroeconomic policies were relatively stable and solid in the past two decades, especially comparing with the 1970–80s. In particular, fiscal policy has avoided a procyclical behavior, even before the establishment of a formal rule. While the monetary regime has changed with the implementation of an inflation targeting regime, data limitations preclude us from examining the existence of possible structural breaks.

9

This last result may be somewhat surprising at first. As discussed in De Gregorio and Labbé (2011), there are in principle reasons to believe that Chile’s business cycle should not be significantly affected by copper price movements. The mining sector accounts for only 3½ percent of total employment (or about 7 percent if people employed in activities linked directly or indirectly to mining are considered). Moreover, roughly two thirds of copper production is owned by foreign companies, with the rest corresponding to CODELCO, a state-owned company. As Chile’s fiscal framework entails a rule that sets the path of public spending based on long-term copper prices, the impact of copper price fluctuations should in principle be mitigated. The next section discusses a few possible explanations.

10

The analysis focuses on a horizon of 8 quarters.

11

Chile’s observed GDP growth series is decomposed into a baseline projection and the accumulated effects of current and past innovations, based on a moving average representation.

12

The impulse responses illustrate the impact of a VIX shock in a VAR that includes Chile’s exports and domestic demand instead of domestic GDP.

14

The results are consistent with models where consumption in durable goods and investment fall during periods of high uncertainty, as the high degree of irreversibility would lead firms and consumers to postpone their consumption and investment decisions until uncertainty subsides. See Bernanke (1983).

15

Though for a different period of analysis, Spilimbergo (1999) also finds that the impact of changes in copper prices on Chile’s growth is not merely a reflection of the evolution of output in the copper sector.

16

It should be acknowledged, however, that the evidence on the Ricardian equivalence is limited, especially in economies where a significant fraction of the population lacks complete access to credit.

17

Caballero (2002) argues that the impact of copper price shocks on Chile’s economic activity reflects the fact that copper is used as collateral for external borrowing.

Chile: Selected Issues
Author: International Monetary Fund